How do compound interest double your money? How do you earn compound interest? When will your money actually be doubled? What are the ways I can compound my money? Does these question comes to your mind and you need some idea about it? Well, let’s start real quick and see how money is compounded.
The rule of 72
Let’s start with the rule of 72. This is a simple way to determine how long your investment will take to double, given a fixed annual rate of interest. Dividing 72 by the annual rate of return, you can obtain an estimate of how many years it will take for the initial investment to double itself. For example if your annual interest rate is 9% then 72/9=8 i.e 8 years is when your money will be doubled.
Ways to compound your money
So, how exactly do you compound your money? If you have a little idea about Compound interest you can check out the basics with example here. If you already know what is compound interest but looking for a way to implement it, let’s dive right into it. There are many ways to compound your money, but I will be talking about the 3 most important and easy ones.
1) Bank Interest
This is probably the most easiest way to compound your money but not the most effective one and a lousy one. These days, almost all bank will compound your money but the interest here is quite low up-to 2-6%. Do the rule of 72 and check how many years will it take to double your money with bank interest. (12-36 years) it seems now that is a lot of time.
2) Stock Investments
When invested properly, stock investments are the most effective way to compound your wealth. The stock market provides 8-10% of interest per year or even more in Nepalese market. Following the rule of 72 you can now double your money by 7-9 years. The doubling cycle will more than the bank interest method of compounding. Also remember the time value. The more early you begin, the more doubling cycle you will experience.
However another method of compounding your money through stock investments is with your dividends. The dividend yields will be 3-5% per year. Adding it to previous 8-10% you know how to calculate further. By re-investing your dividends, you will earn dividends upon dividends which is compound interest.
3) Real Estate
Now, the real estate for compounding your money is a deal that will make your day. By flipping in real estate what they say in America or by investing in real estate to generate revenue you can make 15-20% per year. This means you can double your money in 3.6-5 years of time. So, how exactly to earn compound interest from Real estate? Well, here’s an example: Buy an old property – Renovate it and sell it in high. However, you need to have knowledge about buying and selling or else you could loose time and money.
Therefore, this is how people generate income and earn with compound interest. They understand the power of compound interest, and how to earn it. You can earn it through your business as well. There are other ways too but these are the ones you should go for making bank interest the least priority. The main thing you need to understand is that you should be doing it and doing it now because the earlier you start the more doubling cycle you will experience.